Mojo - April 2010

U.S. Army Soldiers jump from a hovering CH-47 Chinook helicopter during the helo-cast event on day two of the Best Sapper Competition, Fort Leonard Wood, Mo., on April 20, 2010. Photo via the Defense Department by Benjamin Faske.

Senate Republicans blocked the second vote in less than 24 hours to begin debate on financial reform. The cloture vote lost 57-41, with centrist Sen. Ben Nelson (D-Neb.) again voting with Republicans to prevent the full debate on the Senate floor. That surely means Nelson still hasn't restored the derivatives provision to the bill that's backed by Warren Buffett, the business guru who heads Omaha-based Berkshire Hathaway. The provision would have exempted existing derivatives contracts, of which Berkshire has tens of billions, from posting additional cash or securities as collateral.

The Senate is slated to vote again to begin debate as early as tomorrow, as Majority Leader Harry Reid (D-Nev.) ratchets up the political pressure to cast GOPers as in bed with Wall Street. However, it's unclear when any breakthroughs will occur, as Senate Republicans have said they want more concessions from Democrats on issues like a new consumer protection agency and new regulations on too-big-to-fail banks. For now, the talks continue to stay behind closed doors. That will continue to frustrate Democrats who want to drag the debate into the light of day, where they hope the ties between Republicans and Big Finance will be more apparent to the public and will give financial reform the momentum to reach the finish line.

Look, people. I'm ostensibly from the South, and it does me no small piece of stress to continue to harp on racist Texas cops, angry Virginia Hitler lovers, homophobic Mississippi parents, and unstable, secessionist South Carolina legislators. But it's become apparent that there's this thing called Inner America, which is like Inner Mongolia, only less inviting. Inner America is a mental space where some angry, xenophobic, misogynistic id-impulse is running roughshod over our civil national superego. Inner America isn't confined to any specific place, but sadly, it has many loud, flag-planting adherents in my beloved South.

The immigration reform effort was dealt a big blow last weekend when Sen. Lindsey Graham (R-S.C.), who'd been collaborating with Sen. Chuck Schumer (D-N.Y.) on a bipartisan bill, threatened to abandon the effort entirely unless climate and energy legislation moved ahead first. It's not yet clear what Graham's stance actually means. But Schumer and other leading Senate Democrats are forging ahead with or without Graham, in keeping with Senate Majority Leader Harry Reid's desire to accelerate the reform timetable and bring a bill directly to the floor. According to policy experts and advocates familiar with the state of play, Schumer and other Democrats are presently drafting a framework for immigration reform—an outline that is intended to be the precursor to a bipartisan bill.

"It's an attempt to open things up a bit, to encourage people who might not be ready to go all the way but who are ready to signal quiet support for doing things and give them a vehicle for doing that," one Washington immigration advocate says. Other experts say they've heard of similar movement by top Democrats. "I expect the Democrats will introduce something, not necessarily a bill," says Angela Kelley, vice-president for immigration policy and advocacy at the Center for American Progress. "Democrats need to say where they stand on this...if they're smart, they would put something out that invites the Republicans to the table." According to immigration advocates, the new outline for a reform bill is expected to adhere closely to the bipartisan measure that Schumer and Graham had been previously working on—which includes provisions for tightened border security, a guest-worker program, biometric identity cards, and a pathway to legalization.

In the meantime, Senate Democrats are staying mum about the reports of progress. A spokesperson for Sen. Robert Menendez (D-N.J.), Afshin Mohamadi, declined to say whether the New Jersey lawmaker—the only Hispanic senator and a party leader on immigration issues—and his colleagues are resuming their efforts to push forward with immigration. "Things are very fluid in regards to the immigration issue. We're not to say anything publicly at this point," Mohamadi says. Reid spokesman Jim Manley says that he'd "defer to Senator Schumer," whose office did not respond to a request for comment.

If there was any lingering doubt about why Sen. Ben Nelson (D-Neb.) voted against opening the debate on financial reform, the identity of Nelson's top donor—Omaha-based financial company Berkshire Hathaway, led by guru Warren Buffett—should provide some clue. According to the Center for Responsive Politics, the top givers to Nelson's campaigns are the political action committee and employees of the highly profitable Berkshire Hathaway, who have given Nelson $75,550 throughout his Senate career. Nelson and his wife, the Omaha World-Heraldreports, also own between $1.5 and $6 million in Berkshire stock, financial disclosure forms show. Only five members of Congress have more than $100,000 in Berkshire stock.

Nelson's "No" vote yesterday was attributed to his ties to Berkshire. Nelson had been a top backer in Congress of a provision in the bill that would've exempted the owners of existing derivatives contracts from offering up additional cash or collateral—a requirement that will be imposed on future deals if the finance bill, as it looks now, became law. Lobbying hard for that provision was Buffett, who opposed having to post collateral on Berkshire's existing derivatives deals, a condition he called unconstitutional. However, that Buffett-backed provision was killed yesterday, and soon afterwards Nelson cast his vote against beginning debate on financial reform.

Nelson told the World-Herald that he wanted the exemption in the bill mainly because it was good policy, and he was joined by Nebraska's junior senator, Mike Johanns, who also voted "No" on cloture yesterday. Nebraska's Republican chairman saw it differently, calling Nelson's vote "Yet another backroom deal being orchestrated by Sen. Ben Nelson." There's been no word yet whether that exemption has been put back into the bill. Nelson and his colleagues will return to the Senate floor today at 4:30 pm for another vote on whether to begin full debate on financial reform.

Bethany McLean, a contributing editor at Vanity Fair, is writing a book about the financial crisis with the New York Times' Joe Nocera. She has a piece in Tuesday's Times that must preview the thrust of the book to some extent. The gist of McLean's argument is that the government, not Wall Street (read: Goldman Sachs), is the "real villain of the financial crisis":

It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.

What follows is a long list of the government's failings before, during, and after the financial crisis:

[I]t was the purported regulators, including the Office of the Comptroller of the Currency and the Office of Thrift Supervision, that used their power not to protect, but rather to prevent predatory lending laws. The Federal Reserve, which could have cracked down on lending practices at any time, did next to nothing, thereby putting us at risk as both consumers and taxpayers. All of these regulators, along with the S.E.C., failed to look at the bad loans that were moving through the nation’s banking system, even though there were plentiful warnings about them.

More important, it was Congress that sat by idly as consumer advocates warned that people were getting loans they’d never be able to pay back. It was Congress that refused to regulate derivatives, despite ample evidence dating back to 1994 of the dangers they posed. It was Congress that repealed the Glass-Steagall Act, which separated investment and commercial banking, yet failed to update the fraying regulatory system.

It was Congress that spread the politically convenient gospel of home ownership, despite data and testimony showing that much of what was going on had little to do with putting people in homes. And it’s Congress that has been either unwilling or unable to put in place rules that have a shot at making things better.

This is right. Government—the executive branch, Congress, the Fed, and independent regulators—all fell down on the job. But McLean's overall thesis is dubious. You'd be hard-pressed to find anyone whois "pretending" that "Goldman is the only bad actor." That's ridiculous. McLean goes on to suggest that Congress should "have its turn on the hot seat as well." Does she know there's an election in November? One reason that there's so much voter anger out there right now is because people don't just blame Wall Street for the crisis—they blame Congress and the government, too. And as David has written, people are actually less angry with Wall Street than you might expect.

McLean is arguing against a straw man. Even the leftiest of lefties don't need convincing that government and regulators screwed up. Liberals just believe that stronger, simpler, blunter rules would make it harder for regulators to avoid doing their jobs.

All seven Goldman Sachs executives and staffers testifying before the Senate investigations subcommittee today will say they never actively "shorted," or outright bet against, the US housing market in 2007 and 2008, according to their prepared remarks. They all say their investments that profited from the subprime mortgage meltdown, and later the housing collapse, were merely hedges against risk on their books and countering "long" investments, those that would profit if the housing market's gains continued. "The fact is we were not consistently or significantly net 'short the market' in residential mortgage-related products in 2007 and 2008," Goldman CEO Lloyd Blankfein will testify today.

Goldman's stance is directly at odds with that of Sen. Carl Levin (D-Mich.), the chairman of the Senate investigations subcommittee. Levin said in his opening remarks today that Goldman wasn't merely getting "closer to home," or reaching a neutral point where long and short risk balanced out. To the contrary, Levin said Goldman "blew right past a neutral position on the mortgage market and began betting heavily on its decline, often using complex financial instruments, including synthetic collateralized debt obligations, or CDOs...It was what one top executive described as 'the big short.'"

Fabrice Tourre, the Goldman Sachs trader at the heart of the Securities and Exchange Commission's blockbuster lawsuit, will outright reject the SEC's allegations that he misled Goldman clients and committed securities fraud in a 2007 mortgage-related transaction, according to prepared remarks for a Senate hearing on Tuesday. The SEC's suit alleges that Tourre and Goldman let a hedge fund trader betting heavily against the mortgage markets, John Paulson, pick the bonds underlying a complex product peddled by Goldman called a synthetic collateralized debt obligation (CDO). More importantly, the suit says Tourre failed to disclose to the CDO's two investors—an American institutional investor named ACA and German bank IKB—that Paulson had picked the bonds, which were of such poor quality that they were essentially rigged to fail. (The SEC said 83 percent of the bonds in the deal had been downgraded six months later by rating agencies, and 99 percent had been downgraded a year later.)

Testifying before the Senate investigations subcommittee Tuesday, Tourre will reject the notion that Paulson, who made $3.7 billion in 2007 by betting against the housing market, picked the bonds. Instead, Tourre will say Paulson had input, but that ACA "ultimately analyzed and approved every security in the deal." He adds, "ACA had sole authority to decide what securities would be referenced in the transaction, and it does not dispute that point... If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue."

Tourre, set to face a barrage of questions during Tuesday's hearing, concludes his remarks by defending himself in the deal, one of several dozen deals called Abacus. "I wish to repeat—I did not mislead IKB or ACA, two of the most sophisticated investors in these products in the world," he will say.

After Senate Republicans killed the Democrats' first attempt to begin debating financial reform, members of both parties now head back to closed-door negotiations in an effort to bridge the differences between the Ds, nearly all of whom support the bill, and the Rs, who mostly don't. Sen. Richard Shelby (R-Ala.), a top GOP player in the battle to rewrite financial regulation, told reporters after Monday's cloture vote that he looked forward to a few more days of talks in order to reach some kind of bipartisan agreement. In the days ahead, both parties are going to "try to put that bill together," Shelby said.

In the same breath, though, the affable Alabaman said he wanted to see more concessions from the Democrats. "What I would like to do is reach an agreement on three big sections," he said. He didn't elaborate on what those three "big" sections were, but it's likely Shelby meant resolution authority (how future regulators wind down and euthanize failing big banks without bailing them out); a new consumer protection agency (GOPers and Dems have clashed over the agency's power to write new rules); and, potentially, new oversight of derivatives (the financial products that let manufacturers and utility companies hedge risk but allow financial firms to gamble on the markets). A second cloture vote is likely to happen later on Tuesday. Are Democrats poised to concede more ground to Republicans on a bill someexpertssay is already miles from ideal?

Strike Soldiers with Company D, 2nd Battalion, 502nd Infantry Regiment, 2nd Brigade Combat Team, 101st Airborne Division (Air Assault), plan out their operations before entering a replicated Afghan village during a tactical call out mission, on April 15. Photo via the US Army.